The rise and fall of Indian socialism: why India embraced economic reform.

• Author: Staley, Samuel R

When the Hindu radical Nathuram Godse murdered Mohandas Gandhi in 1948, he also killed the immediate prospects for a market-oriented Indian economy. Gandhi was sympathetic to village life and the entrepreneur, while his successor, Jawaharlal Nehru, was enamored with Soviet-style economic planning.

India became the poster child for post-World War II socialism in the Third World. Steel, mining, machine tools, water, telecommunications, insurance, and electrical plants, among other industries, were effectively nationalized in the mid-1950s as the Indian government seized the commanding heights of the economy.

Other industries were subjected to such onerous regulation that innovation came to a near standstill. The Industries Act of 1951 required all businesses to get a license from the government before they could launch, expand, or change their products. One of India's leading indigenous firms made 119 proposals to the government to start new businesses or expand existing ones, only to find them rejected by the bureaucracy.

The government imposed import tariffs to discourage international trade, and domestic businesses were prevented from opening foreign offices in a doomed attempt to build up domestic industries. Foreign investment was subject to stifling restrictions.

But the planners failed. Manufacturing never took off, and the economy meandered; India lagged behind all its trade-embracing contemporaries. Between 1950 and 1973, Japan's economy grew 10 times faster than India's. South Korea's economy grew five times faster. India's economy crawled along at 2 percent per year between 1973 and 1987, while China's growth lept to 8 percent and began matching rates for Hong Kong, Taiwan, and other Asian tigers. Even as that reality became clear as early as the late 1960s and early 1970s, India's policy makers refused to give up on economic planning. Experts and elected officials settled for what they called the "Hindu Rate of Growth," which, according to official figures, was sluggish at about 3 to 4 percent per year. That would be respectable for a developed country like the United States or Germany, since they start from a higher economic base. But for a country like India, it's abysmal.

Attitudes finally began to change in the 1980s, as India's persistent budget deficits forced austerity measures in the middle of the decade. A foreign exchange crisis in 1991 precipitated major shifts in public policy thinking. The government brought spending...